Retail

Many brands, particularly in retail, seem stuck in a persistent malaise. Earnings report after earning report detail tepid sales and mostly flat-lined profits. The accompanying press releases describe the consumer as “on the side-lines.” Others opine that shoppers have adopted a wait-and-see attitude toward spending. The CEO of The Container Store recently concluded that we are experiencing a “retail funk.”

I freely admit I don’t know a lot about aerodynamics. But what I do remember about why planes stall mainly has to do with their speed and the “angle of attack” of the wings. The reasons we are seeing a big stall in retail are similar.

The lack of speed comes from little to no growth in discretionary income. Combine that with a consumer wariness toward spending after a brutal recession–and an uneven recovery–and we have little forward thrust. There is little reason to believe that this will change markedly anytime soon. And, of course, no brand can do anything to change these macro-economic factors.

The angle of attack is how you approach the market–and this is entirely within your control. Confronted with a lack of acceleration you can choose to follow the herd, taking a one-size fits all approach, making average products for average people, engaging in a race-to-the-bottom price war and so forth. Best case: you hold your ground and your results are in line with your industry segment–which is to say strikingly mediocre. Worst case: inadequate speed and an insufficient angle of attack cause you to plunge to the ground. Not very appealing.

Perhaps you’ve noticed that even in the worst of times there are still some clear winners. Perhaps you’ve noticed that somehow, even when the stock market goes through its gyrations or consumer confidence wanes or weather conditions are not conducive to seasonal apparel sales, somehow or other, a few brands manage to shine.

Maybe these brands are less concerned with the speed of the market and more focused on their angle or attack?

Maybe if you are losing lift, you might want to stop doing the same things over and over that got you there in the first place?

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I bought some JC Penney shares on Thursday in advance of their earnings announcement.

I almost never buy individual stocks, but this was an easy decision. Penney’s execution has improved dramatically since Ron Johnson’s departure. Two major competitors–Sears and Kohl’s–are flailing. The year-over-year comparison is absurdly easy. Inventory seems to be tightly managed, which virtually guarantees a solid lift in gross margin. But mostly importantly, negative Wall Street sentiment has been fueled by much fundamental misunderstanding–as evidenced by the large amount of short interest.

My hunch was right. Penney’s reported better than expected performance. And the stock has popped some 15%.

Yet I am keenly aware that better is not the same as good. Penney’s has a huge amount of work to do just to get back to the performance level of the pre-Johnson era which, frankly, was solidly mediocre. The moderate department store sector has basically become a zero sum game where top-line growth must come from stealing share from the competition. And competition is, and will remain, intense.

I am, however, optimistic about the immediate-term. The self-inflicted wounds of the Johnson era are gone. Marketing and merchandising are moving in the right direction. Appropriate attention is now being placed on e-commerce and omni-channel capabilities. As Sears sinks into oblivion, JCP is poised to gain market share and leverage their real estate position. Mike Ullman’s back-to-basics strategy is appropriately conservative and should result in steadily improving gross margins.

It’s also important to note that a year ago Penney’s had done virtually everything one could think of to chase customers away. Importantly, a significant percentage of their stores were off-line in preparation for the home re-launch. Gross margins were getting pummeled by clearance markdowns. Lastly, retail remains a relatively high fixed cost business. As sales improve (both in-store and on-line) Penney’s will start to see tremendous operating leverage.

So for me, better is a virtual certainty for Penney’s–at least for the next few quarters. And those who see the brand at the brink and in need of massive store closings are going to be disappointed (and, as an aside, they also fail to understand the importance of physical stores in driving the online business and overall omni-channel strategy).

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As a former Sears senior executive I’ve followed the once mighty brand’s journey from mediocrity to bad to just plain sad. What a long strange trip it’s been.

When I left in late 2003 we were gaining traction in our core full-line department store business and piloting several important growth initiatives. To be fair, whether we could pull off the necessary transformation was highly questionable. But one thing is now certain. The subsequent actions taken under a decade of Eddie Lampert’s leadership have assured the retailer’s demise.

For some time now, I’ve been referring to Sears as the world’s slowest liquidation sale. After yesterday’s annual shareholder meeting, it is time to stop the charade and embrace the inevitable. Here are the 5 reasons Sears needs to throw in the towel:

No value proposition. No reason for being. After all this time Lampert has still failed to articulate a vision of why and how Sears will fight and win in the intensively competitive mid-market sector. In fact, just about every action that has been taken over the last 10 years has weakened Sears competitive position. And the horrific results make this plain for all to see. The world–and particularly the mall–does not need a place to buy a wrench and a blouse and a toaster oven.

The competitive gap continues to widen. In every major product category Sears has lost relevance (and market share) while key competitors continue to improve. In hard goods, Sears is fundamentally disadvantaged by their real estate and as a practical matter there is not enough time nor capital to fix this core issue. In soft lines, they have been given a great gift by the recent foibles of JC Penney and Kohl’s and yet still woefully under-performed. Both competitors have key advantages relative to Sears. As they start to execute better they will win back the share they lost.

Digging a deeper hole. For Sears to be a successful omni-channel retailer their core physical stores have to be compelling. Sears has under-invested in their brick and mortar stores for years, so not only do they have a lot of catching up to do, they have to develop and roll-out a new store design and related technology support. One need only to look at the capital that successful retailers like Nordstrom and Macy’s are investing to get a sense for the magnitude of what will be required. There is simply no way for Sears to earn an adequate return on this level of investment. More practically, Sears can’t possibly fund this.

A leader who is either a liar or delusional. The results speak for themselves: Lampert doesn’t know what he is doing. After 28 straight quarters of declining sales–let THAT sink in for a minute–he has the chutzpah to assert, among other things, that Sears is investing in where retail will be in the future (huh?), that the “Shop My Way” member program is some huge differentiator, that having fewer, less convenient locations than the competition is a good thing and that Sears can compete effectively with Amazon. All of these hypotheses would be laughable if the implications were not so tragic. Whether he really believes any of this is, or is merely spinning the story to buy time, remains an open question. But regardless of whether he is being disingenuous or whether he is nuts, you’d be crazy to give him your money.

Valuable assets get less valuable every day. There are pockets of meaningful value within Sears Holdings. But proprietary brands like Craftsman, Kenmore and Diehard are not sold where the majority of customers wish to buy them. Ultimately the brands are only as good as their distribution channels. Simply stated, as Sears and Kmart continue to weaken, so do the value of these brands. Side deals with hardware stores and Costco barely move the dial. Sears real estate is also cited as a major source of value, yet the real estate portfolio is a very mixed bag: some great properties in A malls, but lots of locations that are mostly liabilities. Regardless of how this all nets out, it is becoming increasingly clear that, on balance, mall-based commercial real estate has lots of supply, but relatively little demand for new tenancy. As retailers continue to prune and down-size their locations it is difficult, if not impossible, to make a case for Sears real estate value increasing over time.

The uncomfortable and sad reality is this: Sears has zero chance of transforming itself into a viable retail entity. Any further investment in this sinking ship is throwing good money after bad. Stripping out the idiosyncratic technical reasons for gyrations in the Sears stock, the underlying true company economic value declines each and every day. There is no plausible scenario where this trajectory will change.

Frankly, it’s been game over for some time now. It’s only Sears legacy equity and Lampert’s ability to pick at the carcass that has propped up the corpse.

Let’s stop the insanity.

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There is no shortage of business bestsellers, insightful white-papers and Harvard Business Review articles regaling us with multi-point programs to drive successful growth strategies. Consultants abound–including this guy–pushing clever frameworks to guide your brand to the corporate promised land.

Yet despite an abundance of knowing, there is a paucity of doing. The same companies with the same access to the same information–employing high quality, well-intentioned executives–get widely (and sometimes wildly) different results.

Having spent more than a decade working in omni-channel retail driving customer-centric growth initiatives, I’m often asked which company is the leader in this space. I usually say Nordstrom.

I led strategy and multi-channel marketing at Neiman Marcus during the time Nordstrom began investing in customer-centricity and cross-channel integration. So I can spout chapter and verse about the differences between our approaches and all the opportunities we missed. But with Neiman’s announcement this week of their new customer-centric organization (better late than never!) there are a few key things to point out:

Neiman’s has a lot of catching up to do

We knew the same things Nordstrom knew when they aggressively committed to their strategy nearly a decade ago

Nordstrom acted, we (mostly) watched.

We can quibble about some of the facts and the differences in our relative situations, but when it comes down to why they are the leader and Neiman’s–and plenty of others–are playing catching up, it comes down to this:

Nordstrom had a CEO who fundamentally believed in the vision and who committed to going beyond short-term pressures and strict ROI calculations

They went all in.

In a world that moves faster and faster all the time, organizations are really left with two core strategic options: Wait and see or go all in. Most choose the former and end up going out of business or stuck in the muddling middle.

Going all in doesn’t mean investing with reckless abandon or rolling the dice. Most all in companies do plenty of testing and learning. But testing with a view toward scaling up or moving on is a sign of commitment and strength not uncertainty and weakness.

Going all in must start at the top, with an executive who is wired to say yes. An all in strategy is fraught with risk. Mistakes will be made. You need a boss who has your back.

Going all in necessarily requires a supportive culture, but without complete organizational commitment it’s not nearly enough.

Going all in doesn’t pre-suppose a journey without bumps in the road. All in companies know how to fail better.

Culture eats strategy for breakfast?

Commitment eats strategy for lunch, dinner and a late night snack.

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Yesterday Radio Shack announced it’s closing 1,100 stores, nearly 20% of their total. Earlier this year, JC Penney took the axe to 33 units, amidst a rising call of analysts pushing for more aggressive real estate pruning. Sears has closed some 300 units across the last 3 years, including recent decisions to shutter its downtown Chicago and Seattle “flagships.”

For those pushing a shrinking to prosperity agenda, the rationale is that eliminating the weakest units in the portfolio improves overall productivity. Well, yes, that’s just math. Unfortunately you don’t make money on ratios.

They also claim that with the growth in e-commerce fewer stores are needed. While there is an element of truth to this, it ignores the vital inter-relationship between physical stores and digital channels. For the vast majority of multi-channel retailers the web drives store traffic and stores drive e-commerce. Close stores and you hurt your e-commerce business because your brand become less accessible, and therefore less relevant.

Now don’t get me wrong. If a company is hemorrhaging cash and the data show that a given location cannot be made cash positive quickly (including the effect on the digital business, net of closing costs), it needs to go. Marginal economics 101. And certainly with shifting populations, rapidly evolving consumer behaviors and changes in real estate conditions, there is always going to be a steady stream of real estate rationalization.

Yet the heart of the matter for all the retailers at the center of the store closing debate is this: their value proposition is not working. Unless you shift your business model to becoming more destination driven–or somehow more regionally focused–closing a bunch of stores is likely to make things worse in the aggregate. You lose economies of scale and scope. You become less convenient to your target consumers. Your brand visibility declines.

Brick and mortar retail is not dying. But it certainly is becoming different. Yet it’s not hard to find many examples of winning brands that continue to open plenty of stores (e.g. Walgreen’s, Michael Kors). In fact, in the face of all this talk about mass store closings, formerly e-commerce only players like Warby Parker and Bonobo’s are now opening physical locations. I guess they must be really stupid.

I cannot recall a single retailer that engaged in large-scale store closings in the last decade that is thriving today. Actually every one I can think of is either gone or gasping for breath.

For Radio Shack and Sears, the hacking of their store count signals that they don’t have a viable strategy to survive and that their store closings are more rooted in desperation and the desire to keep the wolf from their door. For Penney’s, if they are able to craft (and execute) a value proposition that fights and wins in the middle market–no easy task–chances are they can support more stores, not fewer. If they announce plans to cut more than 10% of their units, it’s likely the beginning of their slide into oblivion, not a sensible bit of financial engineering.

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There is plenty to ponder when the subject is branding. Lots of agencies, consultants, marketing gurus and academics have frameworks and models for assessing a brand’s strength. Varying definitions abound. I like Seth‘s:

A brand is the set of expectations, memories, stories and relationships that, taken together, account for a consumer’s decision to choose one product or service over another. If the consumer (whether it’s a business, a buyer, a voter or a donor) doesn’t pay a premium, make a selection or spread the word, then no brand value exists for that consumer.

Therefore a brand is a promise, a pledge of trust. Without the buyer’s willingness to believe in the delivery of that promise, the brand is irrelevant. So confidence in the minds of consumers is essential.

But so is confidence in the mind of the marketer.

Confident brands lead from a position of authority. They take risks. They don’t need to over-explain or hard-sell their customers. Options are abundant. This is a brand playing offense.

We can easily sense the brand that lacks confidence, that sadly has lost–or never had–its mojo.

Unconfident brands are defensive. They cast too wide a net for customers. They compete too heavily on price. Their advertising lacks focus and nuance and instead is characterized by shouting and bludgeoning. They default to one size fits all marketing.

The real tragedy is that what flailing brands need the most is precisely what they lack. Without the confidence to face the realities of their situation and to take the bold actions to get on a path to prosperity, their ultimate fate is sealed.

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Yesterday JC Penney reported its first quarterly same store sales increase in more than 2 years.

Given the free fall the company found itself in during the Ron Johnson era, this news provides a measure of hope. After all, there can be no ascent from a dive without passing through stabilization. And even though the gain was paltry–about 2%–it came during a period of consumer ennui, crappy weather and intense sales promotion throughout the industry. Later this month, when Penney’s reports quarterly earnings, we’ll get a clearer picture of the toll aggressive discounting took on margins.

Unlike some doom-sayers on Wall Street, I am cautiously optimistic about Penney’s near-term. Product assortments are improving, which bodes well for continued top-line growth. While the company still has a bit more work to clear all of Johnson’s merchandise debacles, I expect improving margins as the company better matches inventory to consumer demand. A return to more typical promotional marketing has Penney’s back in the competitive mix. E-commerce improvements are starting to make meaningful contributions.

But of course better is not the same as good.

First of all, we should not lose sight of the fact that even before Johnson’s messianic arrival, JCP was struggling. Despite many attempts to re-invent itself, they remained a middling performer at best, stuck in neutral, in a moderate department store sector that continues to shrink. A transformation was, in fact, needed. Just not the one Johnson and team inflicted upon them.

Second, during the past 2 years Penney’s has lost roughly 1/3 of its sales. That means they need to increase revenue by well over 40% just to get back to where they were in the pre-Johnson, more than a bit mediocre, days.

Retail is still largely a high fixed cost business, and even with some additional pruning in real estate and a shift to more e-commerce, there is simply no way to earn an adequate return without dramatically improved brick and mortar sales productivity. And of course they must accomplish this in an environment of lackluster consumer spending and intense battles for market share. Though, Sears’ slow slide into oblivion should be the gift that keeps on giving.

To be sure, there is much of the proverbial low hanging fruit to be picked. Basics of execution were lost during the past two years. The Johnson merchandise and marketing strategy showed a poisonous contempt for Penney’s core customer. New product concepts were rolled out that were dead on arrival, creating many pockets of incredibly low sales productivity (I’m looking at you Bodum!). The increasingly critical digital channel was left twisting in the wind.

Addressing many of these glaring gaps should come fairly easily and quickly. Crafting a winning, long-term strategy is a totally different challenge.